ECONOMIC FLASH – Real Estate Cools as GDP Surges

September 2018

US Economy: GDP surges but housing cools.

2nd quarter GDP growth was revised upward to 4.2%, as business investment and inventories increased more than initially estimated. High real estate prices and low inventory have hurt existing home sales (-0.7%), which fell in August for the 4th straight month.

US Stocks: Growth and small-caps all the rage.

Technology shares (+15.9%) outpaced other sectors, as the market focus stayed on growth over value. Small-cap stocks also surged, benefiting from the 2017 tax cuts and also less exposure to foreign markets.

Foreign Stocks: Concern over trade, currencies.

Non-US stocks lagged US equity markets, posting losses. The continued strength of the US dollar and escalating trade tensions could not offset optimism about a new US/Mexico trade deal at month-end.

Fixed Income: US debt as safe haven.

Recent global uncertainty has slowed the upward march of US interest rates. The yield on 10-year US Treasuries fell 0.1% to finish August below 2.9%, partly due to foreign investors favoring the safety of US government debt.

Real Assets: Commodities in a tough spot.

Oil (+4.3%) was a bright spot within the otherwise struggling commodities asset class. Soybeans (-8.2%) and other commodities most likely to be hurt by import tariffs and a stronger US dollar weighed down the asset class.

Alternatives: Uneven results.

Generally, hedge fund performance was positive for August, particularly for funds that engage in short-selling as well as buying. However, an unexpected change in the level of price correlation among asset classes surprised many managers leading to flat or negative results for the month.

Equities Total Return

AUG

YTD

1 YR

U.S. Large Cap

3.3%

9.9%

19.7%

U.S. Small Cap

4.3%

14.3%

25.4%

U.S. Growth

5.5%

16.6%

27.5%

U.S. Value

1.5%

4.2%

13.0%

Int’l Developed

(1.0%)

(2.5%)

3.7%

Emerging Markets

(2.3%)

(8.0%)

(1.8%)

Fixed Income Total Return

AUG

YTD

1 YR

Taxable

U.S. Agg. Bond

0.6%

(1.0%)

(1.0%)

TIPS

0.7%

0.2%

0.8%

U.S. High Yield

0.7%

1.9%

3.3%

Int’l Developed

(0.4%)

(1.5%)

(1.6%)

Emerging Markets

(1.9%)

(4.6%)

(3.7%)

Tax-Exempt

Intermediate Munis

0.0%

0.7%

(0.7%)

Munis Broad Mkt

0.2%

0.1%

0.5%

Non-Traditional Assets Total Return

AUG

YTD

1 YR

Commodities

(1.8%)

(3.9%)

0.5%

REITs

2.4%

4.3%

6.1%

Hedge Funds

Absolute Return

0.4%

1.4%

2.2%

Overall HF Market

0.5%

(0.6%)

1.5%

Managed Futures

2.7%

(2.8%)

0.3%

Economic Indicators

AUG-18

FEB-18

AUG-17

Equity Volatility

12.9

19.9

10.6

Implied Inflation

2.1%

2.1%

1.8%

Gold Spot $/OZ

$1201

$1318

$1321

Oil ($/BBL)

$77

$66

$52

U.S. Dollar Index

90.6

85.7

88.2

Our Take

The 2017 tax cuts should continue to support US economic growth and earnings through the end of 2018, although the 4.2% US growth rate of Q2 may mark a high point. Going forward, trade wars, rising US interest rates/inflation and tougher comparisons for US corporate profits are likely to create headwinds for US equities. We are therefore maintaining diversified global portfolios, including an allocation to emerging markets, which have been buffeted by weaker currencies and trade war fears. Despite this, we have not seen a deterioration in the long-term fundamentals (growth, creditworthiness) in many key emerging markets, especially in Asia.

In fixed income, we believe the Fed will continue its program of raising interest rates and reducing the size of its balance sheet, and we have positioned portfolios to limit exposure to interest rates while taking on marginally more credit risk.

We continue to believe alternative investments (hedge funds, etc.) will provide diversification benefits for our portfolios, especially during market downturns, although recent performance has been frustrating.